The Conflict Minerals Rule (Rule) requires SEC reporting companies to undertake diligence and then report their use of certain minerals. The Rule applies to all SEC reporting companies that manufacture or contract to manufacture products containing any of the four “conflict minerals” – gold, tantalum, tin and tungsten. Conflict minerals are found in countless electronic and industrial products. All industries – including public utilities, energy and power companies – are covered by the Rule, and companies must consider what diligence and reporting obligations apply to them and their operations.
Although many in the power industry might expect that they would be outside of the scope of this Rule, there are circumstances in which public utilities, energy and power companies could be deemed to be “manufacturers” or “contract manufacturers” under the Rule and therefore subject to it.
Note: the first reporting period under the Rule is calendar year 2013, so companies should commence a process right away to determine the degree to which (if any) the new Rule applies to them. A company may have only a few products that are covered, but because of the possible scope and cost of diligence, conflict minerals compliance should be considered sooner rather than later.
Failure to comply with the Rule could have serious business and legal consequences. The Rule does not ban or prohibit the use of conflict minerals. But, customer and activist pressure about the use of conflict minerals has already created quite a stir in many industries. It is important to note that the failure of a reporting company to make a required filing could render it ineligible for S-3 treatment. That ineligibility could be significant in accessing the capital markets.
As a first step, a public utility, energy or power company should consider:
- Whether its business involves the sale or lease of any product? (for example, smart meters, demand management/energy efficiency devices, power generators, electrical appliances).
- Whether those products are purchased off-the-shelf for resale or whether that company has any input into their manufacture?
The SEC did not provide much guidance on whether an item is a “product” or whether a company will be deemed to be a “manufacturer.” And, although those seem like straight-forward questions, answering them for purposes of the Rule may require detailed and reasoned analysis.
In addition to considering whether the Rule applies to it, a company will need to plan and implement an appropriate process to deal with this new Rule. Among other things, at the outset, it will need to consider:
- Who will be included in its internal team (legal, compliance, procurement, treasury)?
- Which function will have “ownership” of compliance with the requirements of this Rule?
- How will executives, board members, audit committee members be briefed about the company’s obligations and strategy regarding compliance?
Overall, if the Rule does apply, these companies will need to take certain steps, including:
- Develop a compliance plan and strategies
- Draft policies and determine whether supply agreements should be revised
- Train relevant employees and associates
- Prepare supplier and customer communications
- Benchmark activities to others within industry
- Prepare reports and other disclosure
Indeed, this is one more example of the reach of the Conflict Minerals Rule.